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Much of the grocery industry was crushed on news that Amazon (NASDAQ: AMZN) was buying Whole Foods (NASDAQ: WFM).
We’ve seen this before.
Amazon and Nike (NYSE: NKE) also announced a partnership last week that will allow Nike to sell its shoes directly on the Amazon site. Shares of footwear retailer Foot Locker (NYSE: FL) fell 9% on that news.
Then, consider the pharmacy industry. Amazon scared major drug companies in May when it reportedly started considering an entry into online drug delivery.
Shares of CVS (NYSE: CVS) and Walgreen Boots Alliance (NYSE: WBA), both with market capitalizations of over $80 billion, fell 5% on the news. And that was news that Amazon was merely considering entering the industry, not that it was actually building a platform. But the announcement still managed to wipe out over $8 billion in market value just between CVS and Walgreen.
That proved to be an overreaction. Many of the retail stocks that would be affected, such as CVS, Walgreen, Cigna (NYSE: CI), Express Scripts (NASDAQ: ESRX) and Rite Aid (NYSE: RAD), have recovered since then.
The market jumps to conclusions, but usually cooler heads prevail.
Just Eat shares tumbled 6% last fall when Amazon said it would enter the restaurant delivery service in London. But cooler heads prevailed, as the U.K. delivery company is up 20% since then.
Yes, some companies need to be afraid of Amazon. But other large and steady companies will easily survive, and even thrive, alongside Amazon. In these Amazon-induced selloffs, savvy investors can find opportunities. Here are the top three companies that Amazon won’t crush:
Kroger (NYSE: KR)
Shares of Kroger are down 23% since the news broke that Amazon would acquire Whole Foods, and Kroger shares are off more than 34% in 2017. Now trading at just 14 times earnings, this is the cheapest we’ve seen Kroger in more than three years.
Compared to Whole Foods and other retail stocks, Kroger is a giant in the grocery industry . . . the largest grocery chain in the United States. Kroger has 2,800 stores, compared to Whole Foods’ 440. And, Kroger generates $115 billion in annual sales, eight times what Whole Foods manages to deliver.
Kroger operates far more stores in rural areas where there’s little to no competition. It has a well-established base of stores and has been posting sales growth that’s more than double that of Whole Foods. Kroger has also had marked success in competing in the organic and natural foods markets. Kroger stock pays a 2.1% dividend yield; it has boosted its annual dividend for eight straight years.
Target (NYSE: TGT)
Target shares crumpled 10% on the Whole Foods news, and the stock is down 27% this year. Target now trades at less than 11 times earnings. We haven’t seen its price-to-earnings ratio this low since the financial crisis. Like Kroger, Target has a large installed base of stores, upwards of 2,000, which Amazon-Whole Foods won’t be able to crush overnight.
Target continues to beat earnings expectations and pays a healthy 4.8% dividend yield. It’s one of the few companies that has a near 50-year streak of consecutive dividend increases. Going forward, it has a growth opportunity in e-commerce, with 22% growth in online sales last quarter. But online sales still make up just 4% of total sales for Target.
Costco (NASDAQ: COST)
Costco shares fell 12% on the Amazon-Whole Foods news. This is a $70 billion market capitalization company generating over $123 billion in sales per year. For context, Amazon generates roughly $143 billion in sales. Costco also has a strong balance sheet and owns the real estate most of its stores are built on.
Costco is no small company, and it would be no small feat for Amazon to take on. In fact, Costco has been an ecosystem of customer loyalty and has been successfully competing with Amazon for years by offering ultra-low prices and selling more than just food.
Among retail stocks, Costco pays a modest 1.3% dividend yield. For the last 13 years it has increased its annual dividend annually. Costco makes most of its money from membership fees. This is a recurring revenue stream, and Costco manages a 90% renewal rate on memberships. That creates an ecosystem and economic moat that Amazon will have a tough time breaking.
In the end, the Amazon-Whole Foods news is exciting and it could mean trouble for grocery delivery companies or lesser grocers with high debt and sub-optimal locations. But none of the three companies above has anything to worry about. All three retail stocks are buying opportunities created due to the overreaction to the acquisition news. None can be crushed by Amazon.